Question

Agee Technology, Inc., issued 9% bonds, dated January 1, with a face amount of $1,900 million on July 1, 2021, at a price of $1,870 million. For bonds of similar risk and maturity, the market yield is 10%. Interest is paid semi-annually on June 30 and December 31.

Required:
Prepare the journal entry to record interest at the effective interest rate at December 31. What would be the amount(s) related to the bonds that Agee would report in its statement of cash flows for the year ended December 31, 2021, if it uses the direct method?

Answer 1

• Journal entry asked

Date	Accounts title	Debit	Credit
31-Dec	Interest Expense ($1870 x 10% x 6/12)	$ 93.50 millions or $93,500,000
	Discount on Bonds Payable		$ 8 millions or $8,000,000
	Cash ($1900 x 9% x 6/12)		$ 85.50 millions or $85,500,000
	(to record interest payment)

• Statement of Cash flows

Statement of Cash flows
Operating activities:
Cash interest paid	$ 85.50 millions or $85,500,000
Financing activities:
Cash received from issuance of Bonds	$ 1870 millions or $1,870,000,000